Considering a Reverse Mortgage?

The new millennium has ushered in unprecedented, record increases in home values. Real estate analysts have been repeating the mantra from Rogers and Hammerstein’s classic Oklahoma, “They’ve gone as far as they can go” – only to subsequently witness home prices sore even higher with each passing year.  Juxtaposed to this often irrational escalation is the marked decline in interest rates on CDs, money market accounts, and other fixed income investments during much of the last five years. These two trends have left many seniors property rich, cash poor.

Enter the concept known as the reverse mortgage. Although offered since the 1960’s, reverse mortgages have gained popularity in recent years. Simply stated, a reverse mortgage is a home equity loan without monthly mortgage payments. Each month, the unpaid, accrued interest is added to the ever growing loan balance. What’s the catch? At the borrower’s death or when the borrower moves out of the home, the home will be sold to repay the amount borrowed, plus interest.

There are federal, state, and private reverse mortgage programs. The most common program is the federally-insured Home Equity Conversion Mortgage (HECM). With an HECM, a borrower can choose to receive a lump sum payout, a credit line from which to draw, fixed monthly cash payments, or any combination of these options.

When comparing reverse mortgages, consider the total annual loan cost (TALC). The TALC represents the total cost of the reverse mortgage, including lender fees and other third party closing costs, such as mortgage insurance and servicing fees. Each lender is required to provide the TALC by the federal Truth in Lending Act.

For many seniors who have had a lifelong aversion to debt, the concept of borrowing money against their home is unsettling. An alternative to the reverse mortgage is to sell the home to take advantage of the record housing prices. Many seniors are still unaware of a tax law allowing most individuals to avoid taxes on $250,000 of gain realized upon the sale of a residence (a married couple may exclude up to $500,000 of gain).

Selling a home will provide more available funds and flexibility than borrowing through a reverse mortgage. Cashing in on tremendous profits from selling your home will permit you to make that significant building fund contribution or other gift to further the kingdom. AG Financial offers many stewardship opportunities, such as Loan Fund Certificates and Charitable Gift Annuities, which provide substantial monthly cash flow for you and benefits for ministry. Before you sell your home, be sure to explore alternate housing options, such as renting or purchasing a less expensive residence.

By Bruce R. Durkee, J.D., CPA

President, Legacy Consulting Group

A ministry of AG Financial

Go to www.faithandfinances.org for statistics and more information about reverse mortgages.

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